Liquidated Damages And Earnest Money In Real Estate Contracts

Q: I’m sure I read this in a recent column but I can’t find it on your website, LawProblems.com.

A buyer made an offer to purchase a home and placed a deposit. For some reason the sale did not go through and the seller kept the buyer’s deposit as damages. The seller later sold the property at a higher price and actually benefited from the first deal falling apart. The seller then had to return the first buyer’s deposit because the seller didn’t have any damages. Is this true?

A: It is true that in some real estate contracts, a seller can retain earnest money to cover his or her damages in case the buyer fails to close on the sale. But if the seller has no damages, the earnest money must be returned to the buyer.

However, not all real estate contracts are drafted the same way, and not all states have the same legal requirements.

Some states allow for what is called a “liquidated damages” clause. If a contact contains a liquidated damages clause, a seller keeps the earnest money as his or her only remedy. If the seller’s damages are more than the earnest money, the seller can’t get more money from the buyer. If the seller’s damages are less than the amount he or she received, the seller is out of luck.

Some courts take a dim view of liquidated damages clauses and in many cases will look to the transaction to determine what the parties’ intent was and whether the provision was fair at the time it was entered into.